Episode 5: 6,000 Years of Interest Rates

Tracy Alloway (0:00)

The Odd Lots podcast is brought to you by ExxonMobil.

Richard Sylla (0:03)

Energy lives here.

Tracy Alloway (0:09)

Welcome to Odd Lots. It is Monday, December 7th. I'm Tracy Alloway, Executive Editor of Bloomberg Markets.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal, Managing Editor of Bloomberg Markets.

Tracy Alloway (0:19)

Hey, hey Joe.

Joe Weisenthal (0:20)

Yeah?

Tracy Alloway (0:21)

What's this?

Joe Weisenthal (0:24)

That is a book.

Tracy Alloway (0:25)

Yes, but specifically, it is a 700-page book on the history of interest rates.

Joe Weisenthal (0:30)

Have you read the entire thing?

Tracy Alloway (0:33)

I actually did. And I have to tell you, it is a scintillating read that encapsulates everything from Mesopotamian interest rates in 3000 BC to medieval attitudes towards usury, hyperinflation in Argentina in the 1980s. It's actually a pretty famous book in financial circles. And it was first written by Sidney Homer back in 1963 Now unfortunately, Homer has passed away since then, but I am very excited to say that the guest we have on today is Richard Silla, who's the co-author on the fourth edition of this book and also a professor of economics and financial markets at NYU Stern.

So we are about to embark on a rollicking 6,000 year tour of the history of interest rates.

Joe Weisenthal (1:18)

So, to quick think, they had interest rates back then in Mesopotamia, like this is not a totally modern invention.

Tracy Alloway (1:24)

Oh, Joe, you're going to learn so much.

Joe Weisenthal (1:26)

And studying interest rates could theoretically be pretty exciting right now because we may be on the verge of our first rate hike in several years.

Tracy Alloway (1:32)

Yeah, so what better way to prepare for that historic event than to go back in time and learn about Dutch interest rates in the 18th century?

Joe Weisenthal (1:39)

Let's do it. I'm excited.

Tracy Alloway (1:41)

Professor Silla, thank you so much for joining us.

Richard Sylla (1:44)

Pleasure to be here.

Tracy Alloway (1:45)

I have to ask, so when Sidney Homer first published this book in the early 1960s, that was a time when interest rates were not exactly the hot topic matter that they are now. Why do you think he wanted to look at them?

Richard Sylla (1:59)

Well, Sidney Homer was a kind of a cultured fellow, a Harvard grad who had a career on Wall Street, and I think because he was highly educated and he thought more than most people do about their jobs, and he wanted to know, you know, he was in the bond markets and he wanted to know, you know, what was the origin of them? And for example, he'd heard about the Dutch, Dutch finances being important, well exactly what was Dutch finance? And so he embarked on this history of collecting interest rates as much as he could from, you know, all the recorded history up to that time and decided to put it into one book called The History of Interest Rates.

Tracy Alloway (2:41)

Now, the book starts in ancient times, and it starts with things like Babylonian kings setting the maximum rates of interest on loans of grain. How in the world did Homer go about collecting the data for this book?

Richard Sylla (2:57)

Well, he, if you're talking about Babylonia, there is a great source there, which many people have heard of, but they probably don't think it has interest rates in it. It's the Code of Hameh Rabbi. It was sort of a great code that came. I think it was about 1800 BC or something like that. So it's about 4,000 years ago.

And in the Code of Hameh Rabbi, it sort of specifies that if you lend somebody money, the maximum rate you can charge them is 20%. If you lend somebody grain, apparently people lent grain as well as money, the maximum rate was 33 and a third percent.

Joe Weisenthal (3:28)

So how did they, how did Hameh Rabbi derive these figures? Was it a sort of finger in the wind, 20% seemed like the right amount?

Or was it something more reflective of the economy where there was a basis in reality?

Richard Sylla (3:42)

Well, I suspect that since Hameh Rabbi was saying this is the most you can charge, that there were a lot of lending practices both for money and grain.

And sometimes people tried to charge more than 20 or 33 and a third percent. And Hameh Rabbi thought that was unreasonable. And so he sort of put a ceiling on what could be charged. And I think it was probably sort of customary rates at that time.

Tracy Alloway (4:04)

One of the things I love so much about the book is all the types of collateral that it outlays. So for instance, there's a king of Jerusalem, Baldwin II, who famously pledges his beard for rehypothecation. And there's an ancient Greek city that pledged its public colonnades.